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Loonie closes slightly higher on soft inflation data

The Canadian dollar closed higher Friday amid data showing a disappointing read on U.S. home sales and lower-than-expected price pressures last month.

The loonie ended up 0.14 of a cent higher at 95.23 cents

(U.S.) as the currency erased early losses amid a greenback that weakened after the U.S. Commerce Department said new-home sales dropped 13.4 per cent during July to a seasonally adjusted annual rate of 394,000.

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That's down from a sales pace of 455,000 in June, which was revised sharply lower from a previously reported 497,000.

The report cast some doubt about U.S. growth expectations and raised questions about whether the Federal Reserve will start to cut back on its economic stimulus of $85-billion of monthly bond purchases.

"The massive drop in new home sales will raise an eyebrow at the September 18 Federal Reserve meeting, and could either delay tapering or result in a tinier taper than the market currently anticipates unless it's offset by stronger economic data in the weeks ahead," said BMO Nesbitt Burns senior economist Sal Guatieri.

Meanwhile, Statistics Canada said the July consumer price index came in at an annualized rate of 1.3 per cent, up from 1.2 per cent in June.

Economists had looked for Canada's inflation rate to rise by two-tenths of a percentage point to 1.4 per cent.

Higher gasoline prices were the main reason for the rise in the consumer price index in July. Gasoline prices jumped 6.1 per cent, which helped pushed the overall cost of transportation higher.

On a month-to-month basis, prices were only one-tenth of a point higher in July than they had been in June.

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The dollar has tumbled about 1.5 cents this past week as the U.S. currency rose against other currencies amid a growing conviction that the U.S. Federal Reserve will move this year to cut back on its monetary stimulus.

The Fed has been buying bonds to keep rates low and encourage investment. There is still a great deal of doubt about when the Fed might embark on tapering its asset purchases and the pace of such a cutback.

Speculation about what the Fed may do about its asset purchases has driven bond yields higher. On Friday, the benchmark 10-year U.S. Treasury was down 0.07 of a percentage point from late Thursday afternoon at 2.83 per cent.

But bond yields are still up a good 1.20 percentage points since Fed chairman Ben Bernanke first mentioned the possibility of the Fed tapering its bond purchases in May.

Commodities continued to benefit from the release of strong Chinese manufacturing data Thursday and the October crude contract on the New York Mercantile Exchange was up $1.39 to $106.42 a barrel.

September copper edged up 2 cents to $3.35 a pound while December bullion climbed $25 to $1,395.80 an ounce.

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